Figuring out how to pay for college can be a stressful, complicated process. I remember being overwhelmed when I started at a pricey private college, which I paid for with a hodgepodge of scholarships, grants, federal and private loans, work study, and my own money.
In this article, I’ll outline the basics of federal student loans and private student loans, discuss whether private student loans make sense, look at the current interest rate climate, and explain how to get started in your search for the best student loans.
Money360’s Best Student Loan Companies for 2019:
- Credible: Easiest to Use
- : Best Network of Lenders
- Discover Student Loans: Best for Private Student Loans
If you’re looking to find the best student loan, we’d recommend starting with any of these three companies. Here’s why they stood out to us as the best student loan companies out there:
#1: Credible: Easiest to Use
Credible will give you a quick, accurate overview of your loan options from a number of major private loan providers. Key features of this student loan comparison tool include:
- No origination fee.
- No service fee.
- Private student loan interest rates as low as 3.94% variable and 4.50% fixed APR.
- Student loan interest rates, repayment terms, and amounts depend on the lender, but Credible lets you compare those details from multiple lenders at a glance.
- No prepayment penalty.
- Prequalified student loan interest rates, which means you get a clear idea of your options, not just a ballpark number.
- Good customer support.
- Comparison of multiple private loan options (their lenders include Citizens Bank, College Ave, Discover Student Loans, and more).
- Simplicity of use (you just fill out one form).
#2: SimpleTuition: Best Network of Lenders
Another loan comparison tool, is owned by LendingTree and has a wider network of lenders; it could even help you find federal student loans, thanks to its education tools. Some of the service’s key features include:
- Comparison of a wide range of private student loan options.
- Online education resources, including information about federal student loans.
- Student loan interest rates, repayment terms, and amounts depend on the lender, but SimpleTuition lets you compare those details from multiple lenders at a glance.
- Origination fees depend on the lender.
- Simplicity of use (you just fill out one form).
#3: Discover Student Loans: Best for Private Student Loans
If you want to go straight to a lender to get your private student loan, we recommend Discover Student Loans. Here’s why:
- Variable rates between 4.49% and 13.49% APR, fixed rates between 5.99% and 13.99% APR.
- No loan application or origination fees.
- No loan late fees.
- Good customer support.
- 1% cash reward for GPAs of 3.0 or higher.
- Loans available for up to 100% of your school-certified cost of attendance.
Finding and Comparing the Best Student Loans
Using an online tool like Credible.com or SimpleTuition.com can simplify your search for the best private student loans. These options let you directly compare loans and interest rates from different lenders. Just a few minutes and a minimum amount of personal information will generate a number of options. Alternately, you can go straight to a loan provider like Discover Student Loans.
Private loans can make sense when you’ve borrowed all you can in federal student loans, qualify only for the highest federal interest rates, or need funds quickly. I relied on a small private student loan to fill an unexpected gap in funding my senior year — I was able to get the money almost immediately, but because the interest rate was higher than my other loans, I prioritized paying it back faster.
If you’re not sure whether private or federal loans are the best choice, keep reading.
How Student Loans Work
There are two different types of student loans: federal and private. Most experts agree that the best student loans come from the federal government. These fixed-rate loans usually offer lower interest rates and greater borrower protections than private loans. When you choose a private loan, your credit score (and that of your co-signer, if you have one) will impact the student loan interest rates you’re offered.
Lenders offer student loans to cover almost any type of college education, including community college, technical training, undergraduate, and graduate degrees.
Before we get too far into the specifics, let’s define some terms:
- Interest rate: This is the percentage of your loan amount that you’ll have to pay back, in addition to what you borrowed, in interest fees. (Lenders make money by charging interest on the money you borrow from them.) Lenders compound interest over time, so it can really add up — the best student loans have a low interest rate.
- Loan term: This is how long you have to pay back your loan. Usually, this term is between five and 20 years. A shorter term means higher monthly payments, but you’ll usually pay less in interest fees and be debt-free sooner.
- Fixed-rate student loans: When you get this type of student loan, you know the interest rate that will be applied to your loan through your entire loan term. That rate will not change.
- Variable rate student loans: Lenders can adjust the interest rate of a variable rate student loan at predetermined intervals. Variable rate loans usually start with lower interest rates than fixed ones, but that rate — and with it, your monthly payment — can increase over time.
If you need a detailed primer on other loan terminology, see our guide to student loan vocabulary.
How to Pay for College: Your Ideal Payment Plan
When it comes to paying for college, most financial experts dispense similar advice that follows this roadmap:
- Use free money first. Simply put, this means grants, scholarships, or any other option that doesn’t require repayment. I was fortunate to qualify for a number of grants and scholarships that made going to a private college even cheaper than a public institution. Because of them, I owe a lot less in loans than many of my classmates.
- Use federal loans next. Traditionally, this has been no-brainer advice because Uncle Sam has offered low-interest, fixed-rate loans that eclipsed the offerings of most private lenders. When you’re exploring federal student loan options, try to qualify for subsidized loans. The government will pay your interest while you’re in school when you have a subsidized federal loan, making it one of the most ideal loans for students.
- Use private loans last. Many experts caution against private loans because most low interest rates are variable (and likely to rise over time), while fixed rates are usually higher than the rates on federal loans. As I mentioned above, I had to take out a small private loan at one point — it was convenient, but the interest rate was higher than my other loans.
So, is prevailing wisdom still solid for 2019? Let’s take a look at the interest-rate climate as a starting point in our search for an answer.
A Primer on Student Loan Interest Rates
As mentioned above, the interest rate on your loan is the percentage of the principal, or overall loan amount, that you’ll have to pay back to the lender — on top of the amount you borrowed.
This is calculated many times over the life of your loan on the total amount you owe, including the interest and fees. That’s why you won’t owe only $10,600 after taking out a $10,000 loan with a 6% interest rate. According to you’ll actually be on the hook for $13,332 on a standard 10-year payment plan. That’s why even a slightly lower student loan interest rate can save you a lot of money in the long run.
Federal student loan interest rates
As of the 2018-2019 school year, student loan on undergraduate Direct Subsidized and Direct Unsubsidized Loans are at 5.05%. Meanwhile, rates on Direct Unsubsidized Loans for graduate students sat at 6.6% and rates for Direct PLUS Loans are at 7.6%. Remember, even though rates can reset each year, the rate you receive when your loan is first disbursed remains your rate for the life of the loan.
Federal student loan interest rates are tied to a 10-year Treasury note. Basically, this is a loan investors can make to Uncle Sam. When the rate of return (or yield) on this note rises, you’ll see it reflected in rising federal student loan interest rates. When it falls, student loan interest rates fall, too.
The number that matters is the yield during the May Treasury auction. Officials add 2.05% to that number to determine the new rate for undergraduate Direct Loans, 3.6% to determine the rate for graduate Direct Loans, and 4.6% to determine the rate for PLUS Loans.
These percentages are interest rate cushions set by Congress. Whether federal student loan interest rates rise or fall depends on how the yield on the 10-year Treasury note compares to the yield from the same time last year.
Private student loan interest rates
Private lenders offer both variable and fixed-rate loans, and the rate you’ll obtain is a direct result of your credit history (and your cosigner’s, if you have one).
I used Credible to get personalized offers for a hypothetical student graduating from my own alma mater, American University, in 2021. The personalized interest rates my “student” received were as low as 4.25%.
A 4.25% interest rate on a private student loan certainly seems better than 5.05% on a federal Direct Loan, but there’s much more to these numbers than meets the eye. That’s a discussion I’ll return to after a primer on the types of federal loans and private loans and their respective pros and cons.
Federal Student Loans
There are two federal student loan programs: The Perkins Loan Program and the Direct Loan Program. The former program is much smaller than the latter. You must file a Free Application for Federal Student Aid (FAFSA) to be considered for federal student loans.
Below, I’ll list each type of loan in order of desirability, with the most favorable loans first.
Until the program after Congress failed to pass an extension, a federal Perkins Loan was almost always the best student loan option for those who were eligible. I was awarded a Perkins Loan each year as part of my undergraduate aid package, and it was always a welcome sight in my award letter.
Schools, functioning as the lender in this case, were able to issue Perkins Loans as part of a financial aid package to students who demonstrated significant financial need. Perkins Loans are subsidized, meaning interest is paid for you while you’re in school.
- Interest rate is fixed at 5% and does not reset yearly like other federal loans.
- Interest is paid while you’re in school.
- No loan origination fees (charged for creating the loan) that reduce the amount you receive.
- Undergraduates could borrow only $5,500 a year and up to $27,500 total; graduate students could borrow only $8,000 a year or $60,000 total (or less if they borrowed Perkins Loans as undergraduates).
- You must have extreme financial need to qualify.
- Your school must qualify to offer this type of loan.
Direct Subsidized Loans
Direct Subsidized Loans are also reserved for students who demonstrate financial need via their FAFSA, but the bar is lower here. While your school is your lender for a Perkins Loan, Uncle Sam is your lender for Direct Loans. Only undergraduates are eligible for Direct Subsidized Loans.
- Interest rate is fixed (current rate is 5.05%).
- Your interest is paid while you’re in school.
- Undergraduates can borrow only $3,500 to $5,500 a year (depending on the student’s year in school) and up to $23,000 total; graduate students aren’t eligible.
- You must have significant financial need to qualify.
- Small origination fee (1.062% of each disbursement).
Direct Unsubsidized Loans
Good news: you can qualify for Direct Unsubsidized Loans without demonstrating financial need. All undergraduate and graduate students are eligible.
Bad news: You’re on the hook for the interest that accrues while you’re in school, though you can choose not to pay it until after you’re done (however, this means you’ll end up paying more overall).
- Interest rate is fixed (current rate is 5.05% for undergraduates; 6.6% for graduate students).
- Available to all students, regardless of financial need.
- Undergraduates can borrow only $5,500 to $7,500 a year and up to $31,000 total; graduate students can borrow only $9,500 to $12,500 a year and up to $138,500 total (or less if they borrowed any federal loans as undergraduates).
- Your interest will not be paid while you’re in school.
- Small origination fee (1.068% of each disbursement).
Direct PLUS Loans
Direct PLUS Loans allow graduate students and the parents of undergraduate students to pay for educational costs in excess of what other financial aid, including the federal loans listed above, might cover. Unlike other federal loans, a credit check is performed; those with spotty credit history may not qualify. Those who don’t qualify for the PLUS program may be able to borrow more direct unsubsidized loans.
- Loans can often be used to pay a greater range of educational expenses other than tuition, housing, and books.
- You can borrow as much as you need to cover the cost of attendance minus other financial aid.
- Interest rate is fixed (current rate is 7.6%).
- For undergraduates, parents must sign for this loan on a student’s behalf.
- Hefty loan origination fees (4.248% of each disbursement).
- Credit history will factor into whether you receive a loan.
- Highest interest rate of all federal student loans.
Other federal student loan benefits
Aside from the more appealing fixed interest rates, there are several other reasons federal student loans are considered the best student loans. Here are a few reasons why you should consider them before private student loans:
- Repayment plans can be more flexible than those offered by private lenders, giving students the ability to make payments more proportional to their income. This is especially useful when you start out with a low salary that rises over time, and is a feature I’ve used while paying back my federal student loans.
- Deferment and forbearance allow you to stop making payments for a period of time (the former is more attractive because interest does not build up during deferment). These benefits can be a lifesaver during periods of financial hardship, and they often aren’t offered by private lenders.
- Uncle Sam will also forgive your loan if you die or become permanently disabled — some private lenders offer this benefit, but many do not.
- There are loan forgiveness options for students who go into certain public service careers, join the military, move to certain locations, or volunteer with certain organizations. These programs aren’t available through private lenders.
Private Student Loans
Private student loans are on offer at scores of banks and credit unions. which originally provided federal student loans, is probably among the most well-known private lenders. Interest rates vary from lender to lender, and they can be either variable (more common, especially with lower rates) or fixed. This makes it crucial to shop around using a site like Credible to make sure you’re seeing the best student loans.
In addition, private lenders like Discover Student Loans can offer a wide variety of loan types, such as undergraduate and graduate student loans, as well as loans optimized for specific professions, such as health or law students.
- Applying is quick and easy compared to filling out the FAFSA.
- Loans can be used to pay for a greater range of educational expenses other than tuition, housing, and books.
- You can usually borrow as much as you need to cover the cost of attendance minus other financial aid (this is subject to lender approval).
- Funds are typically disbursed immediately upon approval.
- Loans often have no origination fees.
- Cosigners can be anyone with good credit (not just parents).
- Cosigners can be released from the loan after a period of on-time payments.
- Credit history will factor into whether you receive a loan and what kind of interest rate you’ll receive.
- Interest rates are often variable and may be higher than those offered by federal loan programs.
- You may have to start repaying the loan while you’re still in school.
- Flexible repayment plans, loan forgiveness, and other benefits aren’t guaranteed.
Comparing Your Loan Options: A Quick Overview
With all that in mind, we’ve created a quick table showcasing some of the top loan options available to you today.
|Loan||Lender Type||Interest Rates||Eligible Parties|
|Perkins Loan||Federal||5.0% fixed||Undergraduate and graduate students (no longer available to new borrowers)|
|Direct Subsidized||Federal||5.05% fixed||Undergraduates|
|Direct Unsubsidized Loan||Federal||5.05%-6.0% fixed||Undergraduate and graduate students|
|Direct PLUS Loan||Federal||7.6% fixed||Graduate students, parents|
|Discover Student Loans||Private||5.99%-13.99% fixed, 4.49%-13.49% variable||Undergraduate and graduate students|
|Sallie Mae||Private||5.74%-11.85% fixed, 4.37%-11.23% variable||Undergraduate and graduate students|
|Citizens Bank||Private||5.74%-12.15% fixed, 4.48%-12.31% variable||Undergraduates, graduate students, parents|
|College Ave||Private||5.29%-12.78% fixed, 4.07%-11.32% variable||Undergraduates, graduate students, parents|
|Common Bond||Private||5.29%-9.83% fixed, 3.95%-9.81% variable||Undergraduates, graduate students, parents|
|SunTrust||Private||5.347%-14.05% fixed, 4.372%-13.375% variable||Undergraduate and graduate students|
|Ascent||Private||5.41%-14.46% fixed, 4.25%-13.25% variable||Undergraduate and graduate students|
Federal Loans vs. the Best Private Student Loans
As I mentioned at the beginning of this article, conventional wisdom holds that private student loans are almost never as good a deal as federal student loans. In most cases, this is true. However, if you’ve exhausted your federal loan options or have very limited options, private loans can be the way to go, especially for parents who don’t want to take out a PLUS loan on behalf of their child.
People look to federal loans for their low, fixed interest rates. But it’s not impossible to replicate that with private lenders. As you can see from the table above, many private lenders offer fixed rate loans with interest rates that fall within a percentage point of their federal counterparts. And if you were going to get a PLUS loan anyway, the private route could actually save you money, assuming you have the credit score required to secure a rate on the lower end of the spectrum.
At the end of the day, finding the best student loans comes down to shopping around and comparing your options. Because there are so many loans for students available today, the best lender for your situation may be totally different from someone else’s. Putting in some time now to research and compare rates and terms could potentially save you significant sums of money in the long run.
Four Tips for Getting the Best Student Loan Interest Rates from Private Lenders
Tip #1: Shop around.
It’s obvious, but it’s crucial: You need to compare lenders to find the best student loan rates. Maybe your family has been banking at the same place for years. It could be tempting to take out a loan with your tried-and-true lender and call it a day — but that’s not a wise move unless you know the rate is competitive.
Just as you would shop for the best price on a car, you should shop for the lowest interest rate on a student loan. Sites like Credible can help you compare rates from different private lenders.
Tip #2: Look beyond the interest rate.
Be sure you’re comparing apples to apples by looking at loans for the same amount for the same repayment term, and note whether the rate is variable or fixed. Other things to note:
- What are the fees? According to FinAid.org, if you’re paying 3% to 4% in origination fees, that can roughly approximate to a 1% interest-rate hike.
- What is the grace period before you have to start making payments?
- How flexible are repayment plans, and can you defer payments?
- Are there any borrower rewards — for example, interest rate reductions for on-time payments, automatic withdrawal, or good grades?
Tip #3: Polish your credit (or secure a credit-worthy cosigner).
Just because a private lender will make you a loan doesn’t mean you should take it. Many students have short or poor credit histories, which costs them dearly in the form of higher interest rates. So if your credit history is brief and less than stellar, you’ll need a cosigner with great credit to help you nab a good interest rate when you’re shopping for a student loan. Here’s a primer on how to build credit safely.
Tip #4: Apply for several loans.
Simply seeing what rates are out there probably isn’t going to cut it — you’ll need to actually apply for the loan to make sure you can secure the interest rate you’re eyeballing. You may be surprised at the rate you actually receive — either pleasantly or unpleasantly.
How can I find the best student loans with no credit?
It’s surprising, but true: Private student loan lenders generally require credit scores in the 600s. If you’re a high school student with no credit, getting a private student loan might be difficult.
Again, we recommend exhausting other options such as scholarships and federal loans before considering a private student loan. But if a private loan is your best option, there are steps you can take to get more favorable rate, even with little or no credit history.
1: Become an authorized user.
Becoming an authorized user on a parent’s credit card is one of the most popular ways to build credit history. You’ll be using your parent’s credit card in your name — but ultimately, your parents are still on the hook for making payments.
You don’t even need to use the card to receive a credit boost by association, though — any responsible activity on the card will reflect positively on your own credit report. (Likewise, any missed payments will harm your credit and that of your parents.) If you do use the card, use it responsibly, and don’t rack up any big charges that your parents would have trouble paying for.
2: Consider a secured credit card.
Secured credit cards are designed to help repair bad credit scores. But they’re also ideal for building or establishing credit history. Secured credit cards are backed up by a one-time security deposit, paid when you open the account. That deposit protects both you and the card issuer, should you default.
Consider opening up a secured credit card in your name to build credit. Then, spend responsibly. Most secured credit cards have low credit limits and using too much of your available credit can negatively impact your credit score. Always pay your card off fully every billing cycle to avoid high interest rates.
What is student loan rehabilitation?
Student loan rehabilitation is available for those who have fallen behind on their federal student loans.
If you default on a federal student loan, student loan rehabilitation gives you the opportunity to clear the default and become re-eligible for federal student aid.
Rehabilitation is very different from student loan consolidation or forgiveness. Rehabilitation will not erase student loan debt, nor will it combine multiple existing debts. If you undergo student loan rehabilitation, you will continue to pay the same debt. But your payments may be seriously reduced. And loans consolidated under a Federal Direct Consolidation Loan can still undergo rehabilitation.
Student loan rehabilitation can remove your record of default from your credit history. However, any late payments will remain on your record for seven years.
Borrowers must make a certain number of payments in order to fully rehabilitate their loan, according to the office of Federal Student Aid (FSA):
- To regain eligibility for student aid, borrowers must make six consecutive, voluntary, on-time, full monthly payments on a defaulted loan.
- To fully rehabilitate their loan and remove their default, borrowers must make nine out of 10 consecutive, voluntary, on-time, reasonable, and affordable monthly payments.
In other words, to qualify you must make a number of payments one after the other. To qualify, payments must not be garnished from wages or tax refunds. And the FSA defines on-time payments as payments made within 15 days of the due date.
Payments are considered reasonable and affordable if they are at least 1% of the current loan balance.
What is student loan forgiveness?
Student loan forgiveness is a complicated process. Currently, those who have taken out federal student loans have a number of forgiveness and repayment options.
It’s worth noting that these forgiveness programs apply only to federal student loans. There are currently no formal forgiveness programs for private student loans.
But there are possible coming out of Washington. These changes may affect those currently paying their loan, as well as future borrowers:
Public Service Loan Forgiveness
The Public Service Loan Forgiveness program currently offers forgiveness to Direct Loan borrowers who work full-time in eligible federal, state, or local positions (including most nonprofits). To qualify, borrowers must make 120 eligible payments over the course of 10 years. However, the process is confusing enough that 99% of early applicants were denied, most for not meeting the program requirements.
Federal repayment plans
Borrowers currently have a wide variety of federal repayment and . Forgiveness is based on career choice, level of income, and the amount of years you’ve been making payments.
Start Now to Find the Best Student Loans
Taking out student loans can be overwhelming, especially when it’s the only way you can pay for your education. While federal student loans remain a top option for most students, the best private student loans can be a compelling option for those who have maxed out their federal loans or who can land a very competitive interest rate because of excellent credit.
The first step to obtaining federal student loans is filing your FAFSA — the earlier, the better. If you’re considering a private lender, you’ll want to start by shopping around for the best student loan rates using a site like Credible.com.
Once it’s time to think about repaying your student loans, Money360 has a number of articles with great advice. Learn how to consolidate your loans, make extra money to pay your loans, determine whether it’s better to save or pay your loans aggressively, and figure out how to reduce your loan payments if you’re in trouble.